How Chattanooga Created $1.8B In Startup Exits In Under 5 Years

It's easy for a city to host startups in an unused building -- but Chattanooga offered them super-fast broadband that gave them a competitive advantage. It quickly attracted 671 companies with 14,000 employees.

The mayor of Chattanooga, Tenn. (population 177,571) has valuable advice for cities seeking to create a vibrant startup scene. He neatly articulated in one phrase the advice I offered in Chapter 8 of my recently published book Startup Cities: "Harness your assets."

Chattanooga's Mayor, Andy Berke, earned a degree in Political Science from Stanford and a law degree from the University of Chicago. Since he became mayor in 2013, Chattanooga has hosted many startups - two of which grew and were sold to other companies for over $1.8 billion. This success has drawn in over $1 billion in local capital, boosted wages and local housing prices and sent the unemployment rate down to about 3 percent.

Why has Chattanooga achieved such notable and rapid success?

The key is Chattanooga's city-wide gigabit broadband network (with speeds 200 times faster than the national average) -- which gives companies that locate in the city a competitive advantage.

Based on my experience working with Harvard professor, Michael Porter, who made competitive advantage famous in his 1985 book, I think the phrase is extremely important and widely misunderstood.

When I teach competitive advantage to undergraduates I focus on four ideas: identifying why customers buy, assessing how they choose among competing suppliers; evaluating how well companies fulfill their promises to customers; and scrutinizing companies' ability to adapt to changing customer needs, new technologies, and upstart competitors.

Customers buy from the supplier that best meets their needs. More specifically, customers rank their customer purchase criteria (CPC) -- factors like price, product quality, and post-sales service -- and pick the supplier that best meets those ranked CPC and has the business capabilities - such as product development, manufacturing, purchasing, and customer service -- needed to keep winning.

In short, competitive advantage is about beating rivals in delivering the most bang for the buck to the customer.

But customers will only stay with a supplier over the long run if it adapts to change effectively. Just because a company has a competitive advantage today, it does not mean it will have one five years from now.

This brings us back to why great entrepreneurs have flocked to Chattanooga - its gigabit broadband network. As Berke explained in a May 2 interview, "In the mid-2000s, our Electric Power Board decided to build a smart grid which enabled wireless transmission of power consumption data - rather than reading meters -- and pinpoint and repair problems in the system. Thanks to a $110 million funding grant from the American Reinvestment and Recovery Act, we were also able to build a gigabit fiber optic network along the utilities' rights of way. We turned on the gig in 2010."

According to Berke, Chattanooga's network is much faster than Comcast's which transmits data more slowly both when users send an email, referred to as upstream traffic, and when they receive an email, which is called downstream traffic. Comcast's upstream traffic rate is 3 million bits (the smallest unit of data in a computer - either a 0 or 1) per second (Mbps) while its downstream rate is 25 Mbps. Chattanooga's Gig transmits both upstream and downstream at 10,000 Mbps.

Gig is more ubiquitous than its rivals. "It's not just in a few locations -- as other high-speed broadband networks are -- it's that fast for everyone in the city," he said.

One startup was able to use this high-speed network to deliver a better service to its customers. As Berke explained, "We host a startup that lets people upload old audios and videos to the web. The gig slashes latency - so users don't have to wait long to upload their content --which makes for a better customer experience."

The gig has helped to attract many startups to the city - two of which were sold for over $1.8 billion. "One company that started here, QuickCue, enables people to use text messaging to make restaurant reservations. It grew fast and was acquired bought by OpenTable for $11.5 million. Another startup, Access America, that gamified logistics, sold out to Coyote Logistics, a VC-backed logistics company, in March 2014 and in July 2015 UPS bought it for $1.8 billion," he explained.

Berke's leadership also played a key role. "In 2013, we were trying to figure out how to get our startup scene into gear. I decided to create an Innovation District by locating our Enterprise Center in a building that had formerly been occupied by the [Tennessee Valley Authority] TVA. I took an existing non-profit, changed its mission, management and name and charged it with getting businesses to come here."

That alone was not enough. As he explained, "We could not get existing companies to move here, Facebook and Apple didn't come, and venture capital firms would not invest. We decided to put money into the local startup scene - including sponsoring a startup competition and fixing up the area's shops and restaurants. In the first two years we had 4,000 events and 600 companies. When local people made money, they reinvested and that attracted outside capital."

The economic impact has been considerable. "In March 2018 our unemployment rate was at a 17-year low and wages are rising. We have attracted over $1 billion in investment to Chattanooga. Our Innovation District currently houses 671 businesses within the 140 acre district, employing roughly 14,000 people. My advice to other cities is to harness your assets - ours are the gig and the outdoors - we have rock climbing, paddle boarding, and hiking. They are talent attractors," he said.

Published on: May 8, 2018

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